Internal Revenue Code (IRC) Section 223 allows individuals who are covered by a compatible health plan, often referred to as a High Deductible Health Plan (HDHP), to set aside funds on a tax-free basis up to the contribution limit to pay for certain out-of-pocket medical expenses. Health Savings Accounts have a triple tax benefit—funds go into the account tax-free, funds grow tax-free and remain completely tax-free when used for eligible medical expenses. Here are some HSA basics to get you started with your HSA.
Here are some other unique aspects of HSAs as defined in IRC Section 223:
- They are owned by you, the participant.
- They can be funded by you, your employer or even a third party.
- HSAs carry over from year to year and are portable if employment changes.
- The IRS sets the annual contribution limits and limits the types of health plans that qualify for an HSA.
- HSA funds can continue to be used for eligible medical expenses, even if you become ineligible to contribute in the future.
Contributions can be made by you, your employer or a third party (e.g. family member or friend). Contributions can either be made on a tax-free basis through a Section 125 Plan or directly into the account on a tax-deductible basis. The IRS sets the maximum annual contribution limit. Generally, HSA contributions do not have to be prorated; however, certain exceptions and conditions apply. Contributions can be made at any time up until the tax filing deadline, typically April 15.
|IRS Contribution Limits||Single Coverage||Family Coverage|
|Contribution Limit (2017)||$ 3,400||$ 6,750|
|Contribution Limit (2018)||$ 3,450||$ 6,850*|
|Additional Catch-up Contribution
(for those 55 and older)
|$ 1,000||$ 1,000|
Basic Requirements to Contribute to an HSA
To be eligible to contribute to an HSA, you must meet a few basic requirements.
1. You must be covered by a compatible health plan. The IRS defines the minimum deductible, maximum out-of-pocket and eligible coverage requirements of an HSA-compatible plan. Your employer benefits representative should be able to indicate if a specific plan(s) qualifies.
|IRS Limits for 2017||Single Coverage||Family Coverage|
||$ 1,300||$ 2,600|
|Maximum Out-of-pocket Limit||$ 6,550||$ 13,100|
|IRS Limits for 2018||Single Coverage||Family Coverage|
|Minimum Deductible||$ 1,350||$ 2,700|
|Maximum Out-of-Pocket Limit||$ 6,650||$ 13,300|
2. You cannot be covered by any non-qualified health plan as it constitutes ineligible coverage. Examples of ineligible coverage include:
- Enrollment in a General Medical Flexible Spending Account (FSA) or Health Reimbursement Account (HRA).
- Coverage under a spouse’s Medical FSA or HRA.
- Coverage under a spouse’s health plan that is not an HSA-compatible health plan.
- Enrollment in a prescription plan which provides benefits before the health plan deductible is satisfied. Note: Programs which provide discounts (but not insurance) on prescriptions are acceptable.
3. You cannot be enrolled in Medicare.
4. You cannot be claimed as a dependent on another person’s tax return.
*Note: The 2018 HSA Contribution Family Maximum was adjusted downward from $6,900 to $6,850 on March 5, 2018 as a result of IRS Revenue Bulletin 2018-10.